BEC Q2 Flashcards
What happens with a return to scales increase
A returns to scale increase occurs when an increase in volume results in cost savings
What happens with a return to scales decrease
When an increase in volume results in a higher increase in costs - it represents a return to scale decrease
What happens with time and price changes
As more time elapses - consumers have more time to switch to other goods and this become more responsive or sensitive to changes in the price of one good
These demand - therefore is more elastic
What is the difference between elastic and inelastic demand
This is how sensitive demand of ra good is to price change
So - if you have a ED LESS than 1 demand is considered inelastic - meaning you can raise prices and revenue will still increase
If your ED is GREATER than 1 - This means that demand is elastic. ( sensitive to price changes so if you raise the price - total revenue will decline ( because you will sell fewer items)
How long are most expansions and recessions
expansions - several years
recessions - several months long (very few lasting more than 2 years)
What should you consider when detraining the price of a product
- its quality
- its expected life
The understanding that the greater the quality and the longer the life -> the greater the demand for the product and the great the price
Also the preference of customers bears into this as well - if customers are more price sensitive - the effect of better quality or a longer life will be less significant than if they are more concerned about quality
What happens when the government borrows to finance large deficits
It exerts upwards pressure on interest rates
As interest rates increase - more lendable funds will be available, but the demand will be greater than the supply
This will have no effect or an increase on the rate of inflation
It tends to decrease the supply of lendable funds
Why would you recommend precious metals as an investment during a period of inflation
Precious metals tend to appreciate in periods of high inflation
Their value is independent of the underlying currency
Why are treasury and corporate bonds a bad idea in an inflationary time
the amount of money aid to the owner is fixed and isn’t adjusted for inflation
They are poor protection against inflation
What about common stocks and inflation
They may offer limited protection against inflation but are dependent on factors other than the inflationary such as industry growth and competitive pressures
What is the impact on product differentiation and price elasticity
it seeks to make the demand for a firm’s product more inelastic
What does the Gaffer Curve demonstrate
It shows that reductions in very high tax rates will result in more revenue.
This is because there will be more economic activity being taxed and therefore more tax revenue in the aggregate
What happens when you have an increase in demand and a decrease in supply
the price will go up but the quantity then purchased is uncertain.
This is because an increase in demand leads to an increase in quantity and a decrease in supply represents a decrease in quantity
When these happen at the same time - the overall effect is uncertain
What is the definition of an inferior product
These are products if their sales fall when incomes rise - people eat less Taco Bell when they have more income and the reverse
What happens when you have an increase in demand and supply stay flat
Price goes up and quantity purchased goes up
